On 22 February 2024, the UK joined an ever-growing number of countries seeking to withdraw from the Energy Charter Treaty (ECT).
Whilst the UK’s withdrawal will not become effective until one year after it issues a formal notice of withdrawal, and even thereafter existing investments will continue to be protected by the ECT’s 20-year sunset clause, investors in the UK energy sector, as well as UK energy investors with investments in other ECT member states, are well advised to consider carefully the holding structures of their existing and any future investments to ensure continued protection of their investments under international law.
Moreover, given the growing number of countries withdrawing from the ECT in recent years, investors would be well advised to consider structuring or restructuring their investments to benefit from, and maximise, protections that are available under other international investment treaties.
The Energy Charter Treaty
The ECT is a multilateral trade and investment agreement applicable to the energy sector that was signed in 1994 and entered into force in 1998.
The ECT provides a framework for energy trade, transit and investment between signatory states and contains a number of important investment protections for qualifying investors from one ECT state investing in another ECT state.
Importantly, the ECT also gives investors the right to bring direct claims against the host state, and to pursue such claims in a neutral forum via international arbitration rather than having to submit the dispute to a state’s domestic courts.
Exodus of member states
Since its entry into force, the ECT has become one of the most litigated investment treaties in the world. As of December 2023, more than 160 arbitrations have been brought under the ECT.
Some high-profile claims under the ECT concerned the phase-out of nuclear energy, the implementation of coal-exit policies,and bans on the exploration and exploitation of oil concessions due to environmental concerns. However, the vast majority of claims under the ECT have been brought by investors with respect to the termination or review of incentives afforded to renewable energy producers.
It was in this context that the EU and its member states called for a modernisation of the ECT to include more robust provisions in the treaty with respect to climate change, sustainable development and clean energy transition, while at the same time ensuring that the right of states to regulate in the energy sector was respected.
However, efforts to modernise the ECT ultimately failed to reach the required majority to ratify changes to the treaty, leading to a raft of countries signalling their intention to withdraw from the ECT. France, Germany, and Poland ceased to be members of the ECT as of December 2023, whilst Luxembourg is set to withdraw in June 2024, Slovenia in October 2024, and Portugal in February 2025. Similarly, Spain, the Netherlands, and Denmark also announced their intention to withdraw from the ECT.
Moreover, in March 2024, officials from all 27 EU member states agreed in principle to a proposal from the European Commission for the EU’s withdrawal from the ECT, with the EU’s withdrawal still being subject to approval by the European Parliament and the EU Council. Importantly, however, the European Commission has taken the position that because areas covered by the ECT largely fall under exclusive EU competence, EU member states cannot remain contracting parties to the ECT once the EU has withdrawn unless they are authorised to do so by the EU.
Impact of the UK’s withdrawal on UK investors and foreign investors in the UK energy sector
The UK’s announcement that it intends to withdraw from the ECT therefore comes at a time of great uncertainty, amongst an ever-growing exodus from the ECT that raises questions about the ECT’s future as a whole.
In the short term, it is important to understand that the UK has not actually withdrawn from the ECT (yet). It has merely announced its intention to withdraw. In order for the UK’s withdrawal to take effect, the UK needs to make a formal notification of withdrawal, which will take effect one year after notification.
Furthermore, even when the UK actually withdraws from the ECT, the UK would remain subject to a 20-year sunset clause, which continues to protect investments existing at the time the withdrawal takes effect. However, any new investments made after the UK’s withdrawal would no longer benefit from ECT protection.
In light of these developments, investors in the energy sector would be well advised to consider carefully existing investment structures to ensure that investments are protected, and will continue to be protected, under international law.
Pietro Grassi, senior associate, Signature Litigation
In particular, given the uncertainties surrounding the future of the ECT more generally (including efforts by the EU to deny the application of the sunset clause in disputes between EU investors and EU member states), investors should consider whether investments could be restructured so as to benefit from protections afforded by other international treaties, such as those contained in one of the more than 2,000 bilateral investment treaties (“BITs”) in force around the world.
While some BITs (similar to the ECT) require investors to have substantial business operations in the relevant treaty state, many BITs do not contain such requirements. This enables investors to benefit from relevant protections by structuring investments via holding companies incorporated in protected jurisdictions.
In this respect, whilst it is not possible to restructure investments in such a manner once a dispute has arisen, pre-emptively (re)structuring investments in a manner that affords investment protections before a dispute becomes reasonably foreseeable is both permissible and – especially for investors in the UK and European energy sector – highly advisable.